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Fevertree Drinks - revenues relatively resilient

Emilie Stevens, Equity Analyst | 8 September 2020 | A A A
Fevertree Drinks - revenues relatively resilient

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Fevertree Drinks plc Ordinary 0.25p

Sell: 2,510.00 | Buy: 2,512.00 | Change 6.00 (0.24%)
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Fevertree's first half revenue fell 11% to £104.2m, reflecting the impact of lockdowns on On-Trade sales in bars and restaurants, which usually account for 45% of sales. Margins contracted thanks to both higher costs and lower revenue, so adjusted cash profits (EBITDA) fell 35% to £23.8m.

The group will pay an interim dividend of 5.41p per share, which is a 4% increase on last year.

The shares fell 5.7% in early trading.

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Our view

Before Coronavirus, falling sales in the UK sparked fears the gin boom had turned to bust. Meanwhile guidance for weaker sales in the US and lower margins undermined Fevertree's long term pitch that it can replicate its success across the pond.

However, the disruptive effects of the coronavirus outbreak mean it's difficult to see whether those trends are continuing. On-trade sales usually make up about 45% of the group's sales and that's where the lockdowns hit. While there's been an encouraging upswing in sales from off-trade partners, sales fell overall. That said, sales still grew in the US, which is encouraging.

Fevertree has benefited from significant operational gearing during the good times. It outsources most of its operations - think bottlers and distributors - and that gives the group flexibility and makes expansion cheaper. A lean operating model means profits drop straight through to cash to reinvest to fund growth. Unfortunately that works in reverse too.

The GDP acquisition is an interesting departure from that model.

Management thinks it will be cheaper to buy the current distributor than build out Fevertree's own capacity, which makes sense. It does increase the size and organisational complexity of Fevertree a little, but that's to be expected as the group grows.

However, GDP also generated EUR10m in 2019 distributing third party premium beers and spirits. Fevertree intends to keep doing this, which marks a departure from the existing business model. It's only a small bolt on and to be honest we hope it stays small. It can be risky when businesses divert their attention away from core competencies.

Despite the recent disruption expectations remain high. While year-on-year revenue growth of 9.7% last year would be music to the ears of most consumer goods groups, Fevertree's premium rating means investors demand more of it.

Explosive UK growth is over - there's a limit to how much premium tonic you can sell and it looks like Fevertree is approaching it. In order to keep making progress international expansion is key, particularly in the US. It's a comparatively untapped market, and the group's investing heavily to try and secure a piece of it.

But although Fevertree retains an excellent business model, very strong brand and a sturdy balance sheet, we think the next few years could be a struggle. North American tastes are geared towards dark spirits like Whiskey and Rum. That puts Fevertree's ginger ales and colas centre stage, and the competitive landscape there is crowded. International rivals will have learnt from Schweppes' failure in the UK and be better prepared.

The decision to grow the dividend is a major vote of confidence in the coming year, and also reflects a sizable net cash position. However, if on-trade sales remain subdued or the lockdowns are re-imposed the group's growth plans could be set back even further.

Fevertree key facts

  • Current 12m forward P/E ratio: 45.3
  • Average 12m forward P/E ratio since floating in 2014: 47.0
  • Prospective yield: 0.8%

Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Half year results

In the UK revenue fell 20% to £48.3m. On-Trade sales fell 61% thanks to the lockdowns, while Off-Trade sales in shops and supermarkets increased 24%. Fevertree has continued to invest in the UK, and has launched its first ever national television advertising campaign and released a new range of premium sodas in March. Fever-Tree remained the most popular mixer in shops with a 37.6% value share. Management expects a "very gradual" recovery in On-Trade going forwards.

Sales in the US rose 35% at constant currency to £27.4m. Off-Trade sales rose 72% according to Nielson data, and Fever-Tree maintained its number one position in the premium mixer category. Management attribute this growth to an increase in the popularity of long mixed drinks at the expense of beer and wine, as well as price reductions.

In Europe revenue fell 30% at constant currency to £20.5m. Management attributes part of this decline to destocking by importers, but says orders between June and August have corrected "the majority of the discrepancy". Underlying Off-Trade sales were up around 30% but On-Trade sales suffered during lockdowns, especially in Southern Europe where bars and tourists in bars are relatively more important.

Sales in the Rest of the World increased 2% to £8m, primarily reflecting Off-Trade strength in Australia and Canada.

Management expects full year revenue to be between £235m and £243m, assuming no further lockdowns, and is still planning for £60m in underlying operating costs.

Fevertree's cash position increased from £128.3m at the start of the year to £136.9m. The group has set up payment plans to support On-Trade customers, and is currently owed £1.1m. The group has upped its bad debt provision from 2.6% to 4.3%.

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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